Specific identification method

What is the Specific Identification Method?

The specific identification method is used to track individual items of inventory. This method is applicable when individual items can be clearly identified, such as with a serial number, stamped receipt date, bar code, or RFID tag.

Specific Identification Method Requirements

The principle requirements of a specific identification tracking system are as follows:

  • Be able to track each inventory item individually. The easiest method is a durable metal or paper label that contains a serial number. Alternatively, a radio frequency identification tag can contain a unique number that identifies the product.

  • Be able to track the cost of each item individually. The accounting system should clearly identify the cost of each purchased item, and associate it with a unique identification number.

  • Be able to relieve inventory for the specific cost associated with an inventory item when it is sold.

These requirements can be achieved with a simple accounting system, possibly just an electronic spreadsheet. This means that a smaller business should find it relatively easy to employ the specific identification method, especially when unit volumes are low.

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Advantages of the Specific Identification Method

The specific identification method introduces a high degree of accuracy to the cost of inventory, since the exact cost at which something was purchased can be recorded in the inventory records, and charged to the cost of goods sold when the related item is sold. This eliminates the use of inventory layering or weighted averaging, which are quite common when large numbers of the same items are stored on the premises.

Disadvantages of the Specific Identification Method

The specific identification method is rarely used, for the following reasons:

  • Rarity of unique items. There are few purchased products that are clearly identified in a company's accounting records with a unique identification code. Thus, it is typically restricted to unique, high-value items for which such differentiation is needed. Most organizations instead sell products that are essentially interchangeable, and so are more likely to use a FIFO, LIFO, weighted average, or similar system.

  • Time consuming. It is very time-consuming to track inventory on an individual unit basis, which restricts its use to smaller inventory quantities.

Examples of the Specific Identification Method

Here are five examples of situations in which the specific identification method might be used:

  • Luxury car dealership. A dealership selling high-end cars, such as BMW or Mercedes-Benz, can use the specific identification method to track the cost of each vehicle individually. Since each car has a unique VIN (Vehicle Identification Number) and a distinct cost based on features and options, this method accurately matches the cost with the sale of each specific car.

  • Jewelry store. A jeweler dealing in expensive, unique pieces like diamond rings or custom-made necklaces can benefit from this method. Each item has a distinct cost based on its material and craftsmanship, making specific identification ideal for assigning precise costs when a particular piece is sold.

  • Art gallery. Art dealers who sell unique paintings, sculptures, or limited-edition prints can use specific identification to match the exact cost of acquiring each artwork with its sale price. This approach is essential for accurately reporting profits, given the wide cost variations between different pieces.

  • Heavy machinery sales. Companies that sell industrial equipment, such as bulldozers or manufacturing machines, can use this method due to the high cost and uniqueness of each item. Tracking each machine’s cost separately helps in accurately calculating profits and managing inventory costs.

  • Yacht and private jet sales. Businesses selling luxury yachts or private jets, where each unit has custom features and a high price, often use specific identification. By matching the exact cost of each yacht or jet to its sale, they can ensure precise profit calculations for these significant transactions.

These examples illustrate how the specific identification method is most effective when dealing with high-value, unique, or custom items.

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